Environmental Law Meets Real Estate Law

Posted on: Wednesday, February 1st, 2012

There is no excuse today for real estate agents not to be aware that the environmental status of properties needs to be addressed in the purchase agreement.

By becoming aware of the issues, real estate agents can avoid the discovery of unexpected environmental issues. Environmental liability is applied to a wide range of actors, not just the polluter.

The level of due diligence required will vary with the nature and use of the property, both past and future.

There are many activities that are inherently high risk to cause contamination. A short list would include chemical plants, battery manufacturing, recycling facilities, asphalt manufacturing, electroplating, metal fabrication, circuit board manufacturing, steel works, leather tanneries, ship building, repair yards, textile mills, drycleaners, scrap yards, service stations and properties with underground storage tanks.

There are methods to investigate and, if required, remediate the contamination. The primary tool is an Environmental Site Assessment (“ESA”) for this investigation.
An ESA starts with what is referred to as a Phase I. A Phase I is mainly a paper search to determine actual and potential site contamination both on and off-site. A Phase I usually takes between 2-3 weeks and costs approximately $2,000 – $3,500.

A Phase II is considered an intrusive investigation to assess potential or known impacts to the soil and groundwater. Usually boreholes and monitoring wells are installed and samples are taken and analyzed at a laboratory. The cost will vary with each project.

ESAs are important to allow for the risk/cost to be allocated properly. If a vendor has an ESA completed prior to offering the property for sale, the vendor can dictate the terms in the agreement. This would include restrictions on the future use of the property in order to limit liability. The vendor might also choose to remediate the property prior to the sale to maximize the sale price and increase interest.

Professionals should be involved early. Full disclosure and indemnities are key to limiting liability.

A Record of Site Condition (“RSC”) which is available under the Environmental Protection Act can provide immunity to the current and future owners if required in the purchase agreement. It is important to be aware that an RSC is required under the Environmental Protection Act when the use is changing to a more sensitive use i.e. industrial to residential.

Real estate agents need to be aware that environmental contamination is best addressed in the purchase agreement. Former owners may still be liable even when selling on an “as is” basis. Purchasers may be liable for existing contamination, ongoing mitigation or off-site discharges.

Agreements that properly allocate the risk and cost are complicated. Representations and warranties need to be clearly drafted. Covenants and conditions to closing are likely required. Indemnities are key, but only as good as the party providing the indemnity which is why holdbacks, securities and environmental insurance might be required.

To avoid the tricks and traps associated with contaminated properties, environmental issues should be addressed early. Knowledge of the risks/issues can lead to solutions. For more information on contaminated properties, please contact me at shari@elliottlawyers.com.

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